Tag Archives: etf-long-short-ideas

TLT: Think Long Term

Many retail investors find it easier to access and buy bond funds or bond ETFs instead of going out andowning individual pieces of paper debt. It has been a dull few years for bond investors. As equity prices have risen higher since 2007 and 2008, bond performance has struggled. For the course of the long term, we remain very bullish on U.S. treasury bonds, and we recommend TLT – think long term. By Parke Shall Bonds can sometimes be tricky for the average retail investor. They are usually priced much higher than stocks, sometimes around $1000 if you want to buy individual bonds, sometimes higher. It’s for that reason that many retail investors find it easier to access and buy bond funds or bond ETFs instead of going out and owning individual pieces of paper debt. There are a growing number of bond ETFs that you can put your money into, but the most important thing to look at is always whether or not these ETFs are levered and what the fees are going to cost you. Bond instruments for the long term should not have leverage, and should simply track the yields of the type of bonds that you want to invest in, whether it is municipal bonds, corporate bonds, or our favorite; government bonds. Here is a list of some of the more popular treasury bond ETFs, from ETF Database , (click to enlarge) Our preference is the iShares 20+ Year Treasury Bond ETF (NYSEARCA: TLT ). It has been a dull few years for bond investors. As equity prices have risen higher since 2007 and 2008, bond performance has struggled. This does not discourage us, however, as our bond investment strategy is to buy long term treasury bonds where we think there is eventually going to be some pricing support and some safety. Our investing strategy is one that always has some exposure to the consistent coupon of bonds. We try to keep some cash, we definitely keep equities, but we always do try and have varying amounts of exposure to bonds as well. Treasury bond prices have fallen, and the latest bit of news from the world of treasury bonds was that China was curbing the amount of money that they were pouring into U.S. government debt. Zerohedge said : As BNP’s Mole Hau put it on Monday, “whereas the daily fix was previously used to fix the spot rate, the PBoC now seemingly fixes the spot rate to determine the daily fix, [thus] the role of the market in determining the exchange rate has, if anything, been reduced in the short term. ” And a reduced role for the market means a larger role for the PBoC and that, in turn, means burning through more FX reserves to steady the yuan. Translation and quantification (with the latter coming courtesy of SocGen): as part of China’s devaluation and subsequent attempts to contain said devaluation, China has sold a gargantuan $106 (or more) billion in U.S. paper just as a result of the change in the currency regime. Notably, that means China has sold as much in Treasurys in the past 2 weeks – over $100 billion – as it has sold in the entire first half of the year. Today, we got what looks like confirmation late in the session when Bloomberg, citing fixed income desks, reported “substantial selling pressure in long end Treasuries coming from Far East.” We believe this move, on China’s part, is due to China needing to access the cash that it has in order to stabilize its stock market. When we look out over a broader term, we believe that Bond prices treasury bond prices will eventually study. Another interesting fact directing the bond market is the fact that inflation is seemingly nonexistent. This makes bond investing even more attractive, we believe. Short-term yields may stay at levels that they are at now for a little while to come. When the Federal Reserve finally gets around to raising rates,Will expect find pricing to begin stick up once again. However, for the course of the long term, we remain very bullish on U.S. treasury bonds, and we recommend TLT – think long term.

Building A Dividend Stream With The Best U.S. REIT ETF

Summary The uncertainty around the interest rate hike was not resolved in September. The high level of volatility is expected to continue in the coming months as well. Take advantage of the occasional dips to build a position in an income stream ETF. Back in June, after the second quarter of high volatility in the REIT sector, I wrote about the opportunity in U.S. REITs. The latest dip was marked during the first half of September towards the Fed’s decision when we saw both the REITs and utilities dropping dramatically. Since the Fed announced that it is essentially pushing out its decision to a later date, there is no reason to believe that the high volatility is behind us and that we will not see high levels of anxiety towards the Fed’s announcements, the one in October or in December. The volatility in REITs is well seen in this Vanguard REIT Index ETF (NYSEARCA: VNQ ) graph. The ETF hit $72 just after Yellen’s announcement, but in the following couple of weeks, it rallied pretty nicely, closing at $75 on September 25. (click to enlarge) Is it still the best U.S. REIT ETF? The next table compares VNQ to the other 15 ETFs that are focused on U.S. REITs. I marked the top five in each of the categories of dividend yield, management fees and the total return during the last 3 and 5 years in green. (click to enlarge) VNQ was favorable in all of the categories, delivering more than 4% yearly yield at only 0.12% yearly management fees with an impressive 72% return during the recent five years. Throughout 2015, through times of uncertainty and concerns, not only has VNQ continued to pay uninterrupted dividends, but also on top of that it grew its dividends by ~10% compared to the year before. The next graph shows VNQ’s quarterly dividends starting Q1’10 until the recent Q3’15. For Q4’15, I have plugged a $1.1 dividend, which is equal to the one paid back in Q4’14. While the other three dividends this year went up by 10%, it would be very hard to believe that the forth one will not grow, but I always like to be conservative: (click to enlarge) How can we model it forward? The 2015 dividend per share is estimated at $3.13, growing 10% year over year. An investor who wants to build a position during the next 10 years can generate some interesting strategies assuming they are willing to invest in VNQ regularly. What can one expect from this type of investment? First thing, let’s examine the dividend growth rate. Nothing can grow forever at the level of 10%. Moreover, this sector like any other sector is exposed to risks. REIT risks are associated with macroeconomic slowdown, space overflow and rental pricing. For a long-term model, let’s judge the growth rate to be 4-5% per year for the next decade. Model Assumptions Dividend rate: The current VNQ dividend rate is 4.2%. Let’s use it in the first year. Dividend growth rate: If we should pick a number between 4% and 5%, let’s go with 4.5%. Tax rate: Since not every investment can be tax free, let’s assume a 25% tax rate on the dividends. Investment: $1,000 invested per month or $12,000 yearly investment across a time period of ten years. The dividends, net of taxes, are assumed to be reinvested as well. VNQ’s price: The ETF price across the years is highly unknown. In order to mitigate that, let’s look at two scenarios. Scenario 1: VNQ’s yearly prices change at the same pace as the dividend per share. That means that in this scenario the ETF price will go up by 4.5% every year. Scenario 2: VNQ’s price remains at $75, or in other words the investment and reinvestment are taking place through the time of dips in the ETF pricing. Scenario 1 results In this case, where the ETF prices are growing alongside the dividend per share, after ten years, the investor has accumulated a holding of 2,093 VNQ shares. This holding has the potential to generate $9,739 in dividends per year. The investor invested $120,000 and therefore can expect 8.1% return on his investment in the tenth year. An income stream that potentially will continue to grow afterwards. Scenario 2 results In this scenario of flat ETF prices through the ten-year horizon, the amount of accumulated shares is ~30% higher than in scenario 1. The holding is getting to a total of 2,783 shares. It has the potential to generate a yearly income stream of $12,946 per year pre-tax. The following year, if we’re maintaining the same assumptions of reinvestment, the income stream after taxes is expected to exceed the $12,000 threshold. After ten years, the investor had invested $120,000 and expects to receive 10.8% in annual dividend return on his investment. Conclusions The anxiety regarding the interest rate will accompany us in the coming months and years. This will generate great opportunities for the long-term investor who is pursuing an income stream. The REIT sector is expected to grow even if the interest rate will rise. I find VNQ to be the best ETF that focuses on U.S. REITs. The patient investor has the potential to gain significant returns by setting their investment strategy straight. As there is no way to best optimize the entry or time the market, the investor should build a position through several purchases. And lastly, an investor should take advantage of the days of panic. These will be the days that will serve them well in the long run.

Who Wants SCHC? I’m Trying To Buy Some

Summary The Schwab International Small-Cap Equity ETF is getting very appealing again as it is dipping much lower amid international fears. I’ve been admiring this ETF for a while but couldn’t get the right entry price, I have a limit order pending. The ETF has a large volume of small-cap securities that are difficult to acquire for your portfolio which enhances diversification. The international equity allocations are fairly diversified. I wouldn’t mind even more diversification, but this is certainly good. I see a reasonable allocation of around 3% to 5% of the portfolio value to SCHC. I’m also using SCHF for part of my international position. The Schwab International Small-Cap Equity ETF (NYSEARCA: SCHC ) is one of the ETFs I have been keeping an eye on over the last month or two. On September 22nd, 2015, I put in a limit buy order for some shares. I’m still waiting to see if the price drops far enough to trigger the order, but it is “good til cancelled” and the standard period is 60 days until it would automatically cancel. Why I like SCHC The Schwab International Small-Cap Equity ETF is a fairly nice fit the diversified equity portfolio. While there are many options for international exposure, there are only a few of them that focus on the small-cap international market. Quite a few years ago there was a theory that small capitalization companies were capable of delivering superior performance because a lack of coverage by analysts would result in less efficient pricing and therefore higher risk premiums could be demanded. With the advent of total market indexes and broad market indexes, the demand for small cap companies increased and it was capable to effectively diversify the risk. International markets tend to be less developed than the U.S. financial market and I believe we may witness the same kind of performance in those markets. As more research is done and risk premiums are reduced, the international small-cap market may see some fairly solid performance. Heads I Win, Tails We Tie If my theory fails to pan out, there is still a benefit to SCHC that qualifies as “good enough”. Because the fund is focused on small-cap holdings it has very little overlap with other major international funds. I already use the Schwab International Equity ETF (NYSEARCA: SCHF ) for part of my international exposure. While there may be some solid correlation in returns due to similar risk factors for international markets, the individual holdings are very different. By adding a small position in SCHC to my international holdings I’m hoping to gain a slight amount of additional diversification. If SCHC simply matches SCHF for total return over the next few years but excels in different quarters, there will still be some benefits to be had from rebalancing the positions. These are probably going to be limited to fairly minor gains, but minor gains rather than a loss is a perfectly acceptable outcome to me. Volume of Holdings SCHC has a fairly impressive 1,666 holdings to go with an expense ratio of .18%. Since the expense ratio remains under .20%, it isn’t high enough to really chase me off and it feels reasonable when considering the sheer volume of international small-cap holdings. These are not the most liquid and easiest to acquire securities. All in all, I feel that I’m getting some value out of paying that ratio. Geography The following map breaks down the geographic allocations of the fund: (click to enlarge) I wouldn’t mind seeing slightly larger allocations to the smaller sections, but this is certainly a reasonable diversified batch. The top 3 countries are on different continents, which is a refreshing change from some of the “international” ETFs that place almost all of the equity in Europe. I have no issue with holding equity in European countries, but I’m buying these funds for diversification so seeing a strong mix of different markets is very favorable. Ideal Allocation I like SCHC as an allocation for 3% to 5% of my portfolio. I would still aim to keep a significant portion of the international equity allocation in the larger capitalization markets that may be more resilient to a sell off. If the markets really turn south and SCHC does sell off, I would want to keep increasing my allocations to take advantage of fear based selling. I think the best way to do that may be to just set ranges for where I want the position to be within the portfolio and to rebalance whenever it gets too high or too low. Since the ETF is free to trade from Schwab accounts, I can rebalance without much concern. What Goes with SCHC? Naturally investors will want a core position in domestic equity funds, but SCHC also benefits from being in a portfolio with long duration treasury securities. Those securities have a negative correlation with SCHC and would be ideal for a portfolio that includes rebalancing. Conclusion After another day of fear drove market prices around $28.50 per share, it seemed worth tagging on a limit buy order and seeing if I’d be able to snag some shares of this ETF. I’ve liked it for a while but didn’t have an order ready and waiting on the August 24th event where so many funds went on incredible sales. Now that we are seeing another attractive entry range, I have an order waiting to scoop up some shares. Disclosure: I am/we are long SCHF. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: Information in this article represents the opinion of the analyst. All statements are represented as opinions, rather than facts, and should not be construed as advice to buy or sell a security. Ratings of “outperform” and “underperform” reflect the analyst’s estimation of a divergence between the market value for a security and the price that would be appropriate given the potential for risks and returns relative to other securities. The analyst does not know your particular objectives for returns or constraints upon investing. All investors are encouraged to do their own research before making any investment decision. Information is regularly obtained from Yahoo Finance, Google Finance, and SEC Database. If Yahoo, Google, or the SEC database contained faulty or old information it could be incorporated into my analysis.